Transcript Slide 1

Chapter Nine
Public policy agenda
=> Health care is unique
Life or death
Private mkt alone cannot be trusted to detrmine
heath care outcome
Why?
Remark: Other goods are crucial for survival
Large expenditure and increasing
Remark: also smartphones expenditures
U.S. Expenditures of Selected Goods and
Services as Share of GDP (1960-2010)
Source: Centers for Medicare & Medicaid Services, National Health Expenditure Data, and National Income and Product Accounts
9-2
Why Gov’t involvement
1. Uncertainty in life => reduce risk => Social Insurance
• Social insurance - government programs that provide insurance to protect
against adverse events
• Examples
– Medicaid (low income people)
– Medicare (insurance elderly disabled)
– Social Security
– Unemployment Compensation
9-3
How Health Insurance Works
• Insurance premium: money paid to an insurance
company in exchange for compensation if an
adverse event occurs / the greater the more the compensation
• People are willing to pay for insurance because of
-1) Expected Value=
(probability of outcome 1)*(Payout in outcome 1) +
(probability of outcome 2)*(Payout in outcome 2) +… +
(probability of outcome n)*(Payout in outcome n)
-2) Risk smoothing: paying money in order to guarantee a
certain level of consumption should an adverse event occur
9-4
Example of Expected Value
Computation
Draw cards from deck of cards
Draw heart and receive $12
Draw spade, diamond or club and lose $4
Probability of drawing heart = 13/52 = ¼
Probability of drawing spade, diamond or club = 39/52 = ¾
EV = (1/4)($12) + (3/4)(-$4) = $0
9-5
Why Buy Insurance?
(A)
(B)
(C)
Probability
of Getting
Sick
Lost Income
if She Gets
Sick
Income if
She Stays
Healthy
Income if
She Gets
Sick
Expected
Value
Insurance Options
Income
Probability
of Staying
Healthy
Option 1: No
Insurance
$50,000
9 in 10
1 in 10
$30,000
$50,000
$20,000
$47,000
Option 2: Full
Insurance ($3,000
premium to cover
$30,000 in losses
$50,000
9 in 10
1 in 10
$30,000
$47,000
$47,000
$47,000
Although both yield same EV, Option 2 is preferred due to risksmoothing.
9-6
Expected value: income
0,9
50
45
0,1
20
2
47
Expected value: health expenditure
0,9
0
0
0,1
30
3
3
Do People Buy Insurance?
• Actuarially Fair Insurance Policy: Insurance
premium = expected payout:
=> WHY PAYING THEN? CERTAINTY!
• Risk Aversion: a preference for paying more – a
risk premium - in order to guarantee
compensation if an adverse event occurs
• Diminishing marginal utility: more is better but…
• U is concave… risk adverse: pain from losing
larger than utility from gaining
9-8
Utility
Why People Buy Insurance
B
UB
U
D
UD
UC
C
• Expected
Utility
A
• Risk
Smoothing
UA
20,000
47,000
50,000
Income
9-9
Do People Buy Insurance with Loading
Fees?
• Actuarially Fair Insurance Policy: Insurance
premium = expected payout:
• Loading fee: the difference between an insurance
premium charged by a company and the
actuarially fair premium
• Current average loading ratio for private
insurance companies=1.20
9-10
Do People Buy Insurance with Loading Fees? Actuarially Fair
Insurance Policy: Insurance premium = expected payout
• Risk Aversion
• Risk Premium
• Loading Fee
9-11
The Role of Risk Pooling
•
•
•
•
•
Our risk is endorsed by the insurer
Pooling to reduce risk =>o/wise it is stuck w/ individual risk
Insurance in a small population
Insurance in a large population
Law of large numbers
• More people in=> more predictable the final outcome =>
charge a fair premium
• Remark: we are dealing w/ equal individual risk
9-12
Why might Government Intervention be needed in the Health
Insurance Market?
• Asymmetric information
– Situation in which one party engaged in an economic
transaction has better information than the other party
• An individual knows her own illness risk, but insurer does not
• Results in Adverse Selection
– The phenomenon under which the uninformed side of a deal
gets exactly the wrong people trading with it
• In charging everyone the same premium, high risk individuals
have a higher probability of buying while low-risk individuals
do not => DEATH SPIRAL
• Table 9.2 pag 183 and read pag 185: Switzerland case and
footnote on effective relevance of adverse selection
9-13
Does Adverse Selection Justify
Government Intervention?
• Experience rating: Private companies can perform some
screening offering different premium but…
• Who will then insure those at high genetical risk? Will they be
offered an insurance at all?
• Scientific progress and equity issue
• Community rating: Gov’t intervention, mandatory
participation and same premium
• criticism: CR it is not fair while ER not so discriminatory
Need to strike the balance b/n fairness and incentive
Conclusion: Gov’t intervention justified
9-14
Insurance and Moral Hazard
• Moral hazard: when obtaining insurance against an adverse outcome
leads to an increase in the likelihood of the outcome (we cannot monitor
the behaviour of the insured)
• Even if insured would in principle incur the same risk , people are risk
adverse and premium is fair=> incentive to increase risky behaviour
• Or seek out more health care services (not needed ?!)
=> Efficiency problem (also asymmetric info)
• Strategies for reducing moral hazard
– Deductible: out-of-pocket payment of health costs
before the insurance company pays
– Co-payment: a fixed amount paid by the insured
for a medical service
– Co-insurance: a % of the cost of a medical service
that the insured must pay
9-15
Price per unit
Overconsumption of medical services due to insurance coverage:
Moral Hazard
Expenditures in the absence of insurance
Additional expenditures
induced by
insurance
P0
a
b
h
.2P0
0
Sm
Dm
M0
M1
Medical services per year
9-16
Price per unit
Deadweight Loss
Expenditures in the absence of insurance
Deadweight Loss
P0
a
b
h
.2P0
0
Sm
Dm
M0
M1
Medical services per year
9-17
Additional Considerations
• Flat-of-the-curve medicine: US 2.5 as much as others,
however difficult to compare (R&S )
• Quality: different life style /difficult comparison (O’ Neil 2007)
• The elasticity of demand for medical services => drawing this
curve… medical advise? Vertical curve? No inefficiencies from
M.H. Why?
• Discretional expenditure /Ethical integrity of physicians
• Empirical study by Anderson, Dobkin and Gross (2010) quasi
experimental: losing insurance implies substantial reduction in
health care utilisation => expanding coverage to curretly
uninsured people => increase in demand for health service
9-18
• Does moral hazard justify government intervention in health
insurance market?
– All third party payment systems generate moral hazard
– there is a trade off, a generous system, reducing risk, more
protection and more MH.
– Paying out of the pocket
– Public no better than private (unlike A.S.)
9-19
Other Market Failures in the Health Care Market
that might Justify Government Intervention
• Information problems by patients
– Lack of information by consumers about the
needed treatment and competency of physician
– Full reliance / No other mkt is like that
=> It is a rationale for many government
regulations? Accreditation granted by American
Medical Association
• Externalities of Health Care
– Negative (excess antibiotics) and positive (flu
vaccine)
9-20
Efficient but also equitable provision of Health Care
Equity Considerations
• Paternalism
– Health care decisions are too complicated to be left in people’s own
hands: Wrong expectations or wrong tastes (not sufficiently risk
adverse)
• The Problem of the Uninsured: Is health insurance too expensive?
- Who are the uninsured?
16% population of which 32 % age group 18-24
Of which 39% earn more than 50,000 $
=> Are people buying enough insurance? Are premium too expensive?
32% of those below poverty line do not have it
Much anxiety about them in US
9-21
High Health Care Costs
Source: Organization for Economic Cooperation and Development [2012a].
9-22
Causes of Health Care Cost Inflation
• The Graying of America
• Income Growth
• Improvements in quality and medical
technology
• Commodity Egalitarianism view: some special
commodities should be distributed to
everyone. There is in fact a strong consensus
in the society that everyone should have
access to at least basic medical services.
9-23
The Health Care Market – main issues/points
• Government-provided insurance (known as social insurance)
makes up a large and increasing proportion of the federal
budget.
• The U.S. spends a large percent of its GDP on health – 17.9%
in 2010. Government-provided health insurance has been an
increasing percentage of the U.S. federal budget
– Reasons for growth include aging of population, growth in
income, third-party payments, and technological change
•
For a risk-averse person, an insurance plan that charges an
actuarially fair premium increases expected utility because it
allows risk smoothing.
•
The more risk averse an individual is, the more he or she is
willing to pay for an insurance policy.
•
By pooling individuals into one insurance program, an
insurance company can lower risk from a societal point of
view.
•
Adverse selection arises when those being insured know
more about their risk than the insurance company. This
prevents the insurance company from charging premiums
that are in line with each individual's expected losses. If the
insurance company instead charges an average premium
across all customers, the low-risk people will tend to drop out
of the plan, and the insurer makes less money.
•
In theory, government can address adverse selection by
providing universal health insurance coverage and charging
uniform premiums. This is inefficient but would eliminate
sorting by risk.
•
• Moral hazard arises when obtaining insurance leads to
changes in behavior that increase the likelihood of the
adverse outcome.
•
There is a trade-off in providing insurance: the more
generous the insurance policy, the greater the protection
from the financial risks of illness but the greater the moral
hazard as well. Efficient insurance balances the gains from
reducing risk against the losses associated with moral hazard.
This can be accomplished by requiring high out-of-pocket
payments for low-cost medical services and more generous
benefits for expensive services.
• Justifications for government intervention in the health
insurance market include adverse selection, moral hazard,
commodity egalitarianism, and health care externalities
•
About 16 percent of the US population at any given time
lacks health insurance. The proportion of the uninsured
population under 65 years old has been growing over time.
•
US health care expenditures as a percentage of Gross
Domestic Product have been growing rapidly over time. They
currently make up 18 percent of GDP.
• Possible reasons include the aging of the population, growth
• About 16 percent of the US population at any given
time lacks health insurance. The proportion of the
uninsured population under 65 years old has been
growing over time.
•
US health care expenditures as a percentage of
Gross Domestic Product have been growing rapidly
over time. They currently make up 18 percent of
GDP.
• Possible reasons include the aging of the population,
growth in income, the prevalence of third-party
payments, and technological change. The evidence
points to technological change as a primary factor.
• HMWK
• 5 (assess the insurance plan) and 6 and 9 (!)
page 199
• http://www.ahrq.gov/